The effort by CalPERS is aimed at weeding out bad-acting investment firms as well as to set a higher standard of conduct for future contractors to follow, according to a San Francisco Chronicle report.
As a result of regulatory actions sparked by the market-timing and late-trading scandal since it kicked off last fall, CalPERS:
- fired Putnam Investments, which was charged with fraud for refusing to enforce its own rules barring investors from rapidly trading in and out of funds
- placed Alliance Capital Management on an internal watch list after the firm said it uncovered agreements that let some favored investors jump in and out funds
- will consider moving against Franklin Resources of San Mateo next month. Franklin, parent of Franklin Templeton Investments, which has received subpoenas from New York Attorney General Eliot Spitzer, Massachusetts Secretary of State William Galvin and California Attorney General Bill Lockyer. Investigators are looking into the propriety of payments made to Morgan Stanley to promote its funds and the possibility that a Franklin salesman helped Prudential Securities evade market-timing restrictions.
“We’re trying to protect the money of our 1.4 million members,” CalPERS spokesman Brad Pacheco told the Chronicle “We’re concerned that these firms have breached their fiduciary duty. We need firms who are ethical.”
Also Wilshire Associates of Santa Monica has publicly acknowledged the US Securities and Exchange Commission (SEC) is reviewing its short- term mutual fund trading, but insisted that the hedging strategy did not violate any laws.
Though Franklin told CalPERS it couldn’t find any problems internally, the company has since suspended three employees for improper trading. In December, Franklin said it placed two employees, a fund trader and an executive on leave for rapidly buying and selling securities in their 401(k) retirement accounts, despite rules barring the practice. The company also suspended another employee, but didn’t give any details about the person’s misconduct.
In light of the most recent revelations, CalPERS said it will talk about whether to fire Franklin at its investment meeting next month. “Franklin will be subjected to the same scrutiny as Putnam and Alliance, ” said Christy Wood, a senior investment officer for CalPERS. Franklin manages $780 million in US stocks for CalPERS.
Other firms who said they have been contacted by the SEC or state regulators include: BlackRock of New York; Dimensional Fund Advisors of Santa Monica; AXA Rosenberg; Grantham, Mayo Van Otterloo & Co. of Boston; State Street Global Advisors of Boston; Schroder Investment Management of New York; JP Morgan Investment Management of New York; GE Asset Management of Stamford, Conn.; and Artisan Partners of Milwaukee. Several, including AXA Rosenberg and Artisan, specifically said they do not believe they are the target of an investigation.